ECU IN THE MEDIA
Shares Magazine - January 2003
Un mortgage s'il vous plait
Un mortgage s'il vous plait
Placing an order for a foreign currency mortgage could see you repay your loan in half the time. Emma-Lou Montgomery explains how it works
Anyone who has watched A Placein the Sun on Channel 4 will already be familiar with foreign currency mortgages. As the programme's presenter Amanda Lamb is always quick to advise, arranging an overseas property with a mortgage in the local currency not only makes life easier, it also makes sound financial sense.
However, fewer property buyers are probably aware that it can also pay to buy your UK home with a foreign currency mortgage. With a foreign currency mortgage, instead of going to your bank and getting a mortgage in pounds sterling, you get a home loan in a foreign currency in, for example, US dollars, Japanese yens or euros.
Why further complicate an already tricky topic, you may think? Well, the main advantage of foreign currency mortgages is simple. They give you the opportunity to borrow money at a lower rate of interest than is possible in the UK. It is not for nothing that financial institutions have traditionally sourced the greatest part of their income from the foreign exchange markets. And as any forex trader knows, these markets can really move.
Given the volatility of the foreign exchange markets, these fluctuations can be quite substantial. At one point in 2000, the euro had declined almost 10% against sterling in less than a year, meaning that anyone who had a euro mortgage would have knocked tens of thousands of pounds off their loan. By choosing a country that has lower lending rates of interest than we have in the UK, you can lighten your mortgage substantially.
However, given the inherent volatility, foreign currency mortgages are not for everyone. Cormac Naughten, head of private client services at ECU Group, says the sort of people who have joined the burgeoning foreign currency mortgage arena are seasoned investors.
'They are more speculative and definitely not risk-averse. We tend to screen people carefully and we do this by giving a worst case scenario of the risks involved. If the reaction is no way, that's not for me, we say that's fine. We want our clients to be able to sleep at night. If someone's up at 2am scanning the markets for rate changes, the benefits of knocking a few hundred pounds off their mortgage are outweighed by the risks to their health.'
ECU Group (www.ecugroup.co.uk) offers managed currency mortgages. This means that the broker actively manages the mortgage, moving it between currencies to enjoy the best rate. Not surprisingly, given the risk involved in such a loan on your home, potential clients have to meet rigorous entry criteria. This includes a salary of more than £75,000 a year. The minimum loan is £100,000 and the maximum loan-to-value (LTV) that is available is 65%. 'These are not going to be your first-time buyers,' Naughten says.
More is the pity for them, though. Figures from ECU show that investors who took out a foreign currency mortgage with the firm in 1988, when they were first launched, could have paid off their mortgage in full by now.
The principles behind ECU's service are simple and potentially highly lucrative. ECU will help organise the finances and arrange a loan, which are all provided by top-end banks such as HSBC Republic and Kleinwort Benson Jersey. Then its discretionary management service kicks in to manage that loan to the best advantage of the client.
'Essentially, we are a currency management firm. The principle is similar to that of a hedge fund. You manage people's assets to make them increase in value, but you also manage the liability so that decreases in size.'
Historically, UK borrowers have been burdened with some of the highest interest rates of any of the major world economies. So being able to borrow money at better rates is something that many mortgage borrowers would jump at. The figures speak for themselves. Take an imaginary £100,000 home loan. If converted into yen at a rate of 150:1, you would have a ¥15 million loan. If the rates go up to 180:1, then ¥15 million divided by 180 would cut your original loan to £83,333.
Naughten says: 'We have seen moves of that magnitude over the past year and the advantage is obvious. There is a second advantage too and that is the cashflow benefit.
'If you have a loan in yen of £100,000, you would pay a margin over the LIBOR rate (the inter-bank rate). The seven-day LIBOR for yen is 0.093%. Plus the 2% lending margin you pay a total of 2.093%. The US dollar has a sevenday LIBOR of 1.3%, the Swiss franc 0.78%, the euro 2.8%. The rates are obviously better than you get with sterling.'
There is also the option to switch back into sterling which is useful at times of political or economic uncertainty, but is used very much as a last resort. Naughten says if a fund were back in sterling, say for interest rate reasons, you would still get a rate of 3.95% to 4.05% currently because there is zero currency risk.
There are obviously risks involved because of the fluctuations in the currencies markets which, as forex traders know, can be dramatic and are fast-moving. Safety measures are in place though to stop investors finding themselves out of pocket in a rapidly changing marketplace, Naughten says. 'The lending bank will agree a conversion limit of typically 115% to 120% of the loan size. If for whatever reason we got the decision wrong, the lending bank would only let the loan get to a maximum of 120% over the original loan before it had the right to step in and convert it back to sterling.'
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